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PKN Orlen: Core earnings slightly worse, net income better in 4Q12 (neutral)

PKN Orlen: Core earnings slightly worse, net income better in 4Q12 (neutral)

23.01.2013 11:34

PKN Orlen reported a mixed set of 4Q12 results this morning with core earnings slightly below and net income above our expectations. Adversely, there was no updated consensus available after the trading statement hence we compare the results to our forecasts only. Clean LIFO EBIT came in at PLN 463m (down 48% q/q) in 4Q12, falling 6% short of our estimate. Surprisingly, the main culprit in the fourth quarter was the petchem segment, although this was partly compensated by a better retail performance. On the other hand, net earnings came in at a loss of only PLN 275m, which surprised on the upside thanks to a much higher contribution on the minority line. However, the quality of the beat is weak as it is purely related to a massive tax reversal at Unipetrol. We expect a neutral market reaction to PKN’s 4Q12 results as the trading statement correctly flagged the key underlying directions. On the other hand, the company’s q/q earnings momentum may be the weakest of the sector and should act as a stark reminder of how unsustainable the company’s earnings power was in 2Q12 and 3Q12. In our view, this downward earnings dynamic has yet to be reflected in PKN’s share price.

Segments: As noted above, petchem surprised on the downside in 4Q12: clean LIFO EBIT at PLN 239m was 17% below our forecast due to weakerthan- expected margin capture. This weaker segmental performance was further exacerbated by a higher loss on the other EBIT line. However, these negatives were somewhat softened by stronger-than-forecast retail performance. Indeed, retail EBIT came in at a robust PLN 98m (up 145% y/y) in 4Q12. Refining clean EBIT at PLN 300m was in line with our estimate. This implies a clean refining margin of US$ 2.1/bbl in 4Q12, somewhat better than the average of the past three years (US$ 1.8/bbl).

Financials/cash flow: The relatively robust clean earnings did not translate into strong operating cashflow. Indeed, OCF was tormented by a massive, PLN 3.3bn decrease in trade payables. As a result, key credit metrics deteriorated with net debt-to-EBITDA at 1.58x and gearing at 23.9% in 4Q12.

Unipetrol: Unipetrol reported a whopping operating loss of CZK 4,468m for 4Q12, broadly in line with the consensus. Reported figures were tormented by a massive CZK 4,386m impairment, as noted in the company’s trading statement a week ago. Net income came in at a loss of CZK 3,100m in 4Q12, beating the consensus and our estimate by 14% and 3% respectively. However, the quality of the beat is weak as it is entirely related to a higher-than-forecast tax reversal. LIFO EBIT came in at a loss of CZK 4,138m in 4Q12, beating our forecast by 5%. In terms of segments, the better petchem compensated for the very weak refining and retail. In fact, retail EBIT (after adjusting to LIFO) was negative for the second consecutive quarter, signalling the challenging environment on the Czech fuel market.

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